7 - 13 September 2000

Heated debate on effect of oil price hikes

by Franco Aloisio

A heated debate is taking place in Malta at present on the effects of the international increase in the price of oil and on the recent news that Malta's fuel bill increased by Lm26m. At present, the price of oil has reached the highest level in 10 years.

On the one hand, the political parties are arguing whether the government should resort to hedging agreements to safeguard the price of oil. On the other, the social partners are worried that the increase in the fuel bill could lead to further burdens on the tax-payer and industry.

Yesterday, opposition spokesman Louis Buhagiar accused the government of incompetence, adding that the Minister for Economic Services Josef Bonnici should have continued entering into hedging agreements for the purchase of oil.

However,Minister Bonnici said hedging agreements do not make sense over a long period of time. He said that, when worked out properly, the increase in the fuel bill stands at Lm2.5m rather than at Lm24m as stated by the Central Office of Statistics.

"The Lm24m figure which was mentioned is the general increase. However 40 per cent of the imported fuel is used in bunkering activities, and the fuel is paid at market prices.

"Another 20 per cent is used in aviation, and it is only the remaining 40 per cent that is used by the general population and industries. The increase in demand and the increase in the price have contributed heavily to the surge in the fuel bill," Prof. Bonnici said.

He added that the Lm2.5m increase in the fuel bill is still considerable, and measures will still have to be taken to curb these increases. "Everything depends on the OPEC meeting of oil producers which will take place on 10 September. We will wait and see," he said.

Economist and MCED chairman Prof. Edward Scicluna said Malta's lack of resources made the country particularly vulnerable vis-à-vis the international volatility of prices for oil and gas. He said that in the long run the rate of increase of oil prices could have an affect on Malta's international balance of payments.

Prof. Scicluna said Malta is transiting from two different systems - from a system in which the government has a total monopoly in the energy sector to a system which requires heavy restructuring and liberalisation and where prices reflect those of the market.

"In the first system, the monopoly can be used in both positive and negative circumstances, especially when prices are on the increase. By cushioning the increases by means of taxes, the government can control the price of oil," Prof. Scicluna said.

The price of fuel in Malta does not necessarily reflect market prices. Over the past months, the international increase in the price of fuel was cushioned by several factors in Malta, including the oil contract with Libya which grants Malta preferential rates for the sale of oil. Moreover, the international increases in the price of oil were cushioned by the subsidies granted by government to Enemalta.